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Scheme for bad assets mooted in Spain

Tue, May 1, 2012, 01:00

MILES JOHNSON

THE SPANISH government’s reappraisal of plans to establish a state-organised vehicle to hive off troubled bank assets has been met with scepticism from analysts as Madrid faced a fresh credit rating downgrade of its lenders.

Standard Poor’s, the US rating agency that last week cut Spain’s sovereign credit rating, downgraded 11 of the country’s largest banks yesterday. The move placed Madrid’s struggle with how it will clean up the sector under further scrutiny as economists argued that €100 billion of additional capital might be required.

The government of Mariano Rajoy, the prime minister, after floating, then scrapping, the idea of a Nama-style “bad bank” when first elected, has begun again to discuss the possibility of placing problematic property loans into one or more specialised asset management companies, officials say.

While no further details have emerged of the structure of such a troubled asset fund, officials have been at pains to stress that the term “bad bank” is a misnomer, as no state money would be used, as in other examples seen in Europe.

Analysts have been quick to point out that, while Nama used state money to take assets from banks at a discount, a Spanish equivalent that did not use state money would struggle to enforce the write-downs required, because to do so would risk forcing the weakest lenders into needing vast amounts of additional capital.

“If the idea is to avoid the ignominy of an IMF bailout, then, without an alternative funding source, this is pure fantasy,” said James Ferguson of Westhouse Securities. “The proposal seems to illustrate just how absent of ideas the Spanish authorities have become.”

The reappraisal of a bad asset scheme for banks follows a warning from the International Monetary Fund last week over the risks that some Spanish banks still posed to financial stability. – Copyright The Financial Times Limited 2012